Portfolio Manager Insights: Themes & Risks for 2024
AI, interest rates, private assets, geopolitics, and a recession are among the top issues and trends uncovered in the 2024 Natixis Institutional Outlook Survey.* To gain further insight, Natixis hosted a portfolio manager panel talk with the following fixed income, equity, and asset allocation experts. Explore highlights of the talk, below.
IS A RECESSION IMMINENT? WHAT ABOUT A SOFT LANDING FOR THE US ECONOMY?
Andrea DiCenso: I’d worry if you start to see a rise in the US unemployment rate, because that's really the linchpin to understanding how deep or how long a likely recession could be. A soft landing, yes. But it's probably not going to feel that soft if you're an individual in a low-income bracket who is already feeling that pinch. You have higher delinquencies on your credit card statements and on auto loans. Our in-house consumer analyst says she doesn't fear a recession for that income bracket until you start to see delinquencies rise on cell phones, because that's the last thing anyone wants to give up.
Bill Nygren: Wage increases have been higher for the bottom quartile of income earners in 2023. Job openings remain high. And just a reminder, ’24 is an election year. Incumbents don't usually get re-elected in the middle of a recession. So I think everything out of Washington will be focused on trying to avoid one.
INFLATION AND INTEREST RATES. HOW DOES IT PLAY OUT IN 2024?
Jack Janasiewicz: If we look at core PCE (Personal Consumption Expenditures) inflation, ex-shelter, today it's running at 2.3% annualized. (Source: Natixis Investment Managers Solutions, as of 12/6/2023) When factoring in shelter costs/prices, we see in the real-time data that it's coming down. We're actually looking at disinflation or deflation in some areas. So you've got core PCE that has this massive pipeline of disinflation coming from shelter. That should get you to the 2% inflation target the Fed is focused on. So maybe the risk for 2024 is inflation gets to 2% a lot faster than people think.
A GEOPOLITICAL BAD ACTOR OR CENTRAL BANK POLICY MISHAP: WHAT’S THE BIGGER RISK IN YOUR MIND?
Jens Peers: For us, the bigger risk is the geopolitical risk. Obviously, we have Ukraine-Russia. We have what's happening in Israel right now. There's a potential still, although maybe lower now given the economic situation in China, of an invasion in Taiwan. There's also newer coalitions forming between countries. That type of unpredictability is something that is very difficult to model.
Andrea DiCenso: We've had a number of geopolitical events play out in the last two years. If you plan for that, you're setting up your entire portfolio for a left-tail event, and that's very difficult to do and earn positive total return for clients. In these past 12 months, we've seen triple Cs within emerging market sovereign debt rally almost 40%. You've seen triple Cs in US high yield rally roughly 14% year to date. (Source: Loomis Sayles Research, as of 12/6/2023) The bond market is willing to look through these geopolitical events. Because on a broader basis, they're looking at what is the main factor that has been influencing markets. It's been interest rates and interest rate volatility. That volatility has come down quite a bit over the last 12–18 months compared to the previous 12. So we're looking at what is the path forward on interest rate volatility. Technology was a market driver in ’23. Does it continue? What sectors do you favor?
Bill Nygren: Obviously, it's been an incredible year for technology. That's resulted in multiples that are higher for that sector. As value investors, we're really used to betting against the consensus because we tend to buy what's cheap. Rather than technology in our portfolios, we're much more interested in things like banks, insurance companies, legacy media names – the stocks that are trading at lower multiples. We do agree with the institutional investor survey consensus on energy. We think energy names are attractive and specifically think that a lot of ESG investors that have just had a blanket avoid-energy position are getting more nuanced about how they think about energy and how much more efficient the US industry is relative to the rest of the world in terms of carbon production per barrel. So we think the investor demand for energy is going to persist.
Jens Peers: Thematically, after two really poor years for renewable energy, mainly because of what's happening in Russia-Ukraine and some issues in the value chain, most of those issues are now solved for quite a lot of individual companies. So I wouldn't say go all in on renewables, but there are a few individual names that are really attractively valued today and are well positioned to benefit from this race to net-zero carbon and the move to energy independence. Another favorable area is with more R&D (research and development) spending. Developments in mRNA technology for medicine are attractive to us. We see a lot more opportunities in areas like oncology.
WHAT ABOUT CHINA AND EMERGING MARKETS?
Andrea DiCenso: What we've seen is obviously the drag from the property sector in China. There is no relief in the near term in our opinion based on our analysis. So we kind of think about emerging markets ex-China at this point. We've seen a tremendous amount of opportunities in Latin America. That's unlikely to be going away anytime soon. We would look specifically towards Brazil, Mexico, Colombia, and Chile. CEEMEA (Central & Eastern Europe, Middle East, and Africa) is a bright spot for emerging markets. I think if you had asked me if I'd be talking about Turkey as being an optimistic place to invest, even three months ago, I would have said no. Here I am, Turkey is an interesting point, yielding more than 13%. (Source: Loomis Sayles Research, as of 12/06/2023) You can find some nice opportunities, whether it be in the banking sector or in their government bonds. And, within Asia, while the yields aren't quite as crazy as South Africa or any frontier countries, we favor Korea, Malaysia, and Indonesia. And India is now rivaling the larger economies with GDP growing around 6%. (Source: Loomis Sayles Research, as of 12/6/2023)
PRIVATE ASSETS HAVE BEEN SEEN AS A DIVERSIFIER. DO HIGHER INTEREST RATES CHANGE THE DYNAMICS?
Jack Janasiewicz: I think a lot of this is a function of liquidity and then rates, because much of this is financing. So, with the higher interest rate backdrop you've seen on the listed corporate side, at least you've seen some of that remark to market. The private investment side is going to be a little bit slower to catch up to that. Maybe there will be a couple of quarters lag in terms of some of that catching up, because private markets don’t have to either A, mark to market, or B, don't have the liquidity requirements that the public markets need. So I think you might see a little bit of headlines that maybe are not quite as supportive in the near term.
Bill Nygren: To us, private equity is really just an equity investment that's levered. And the investors have the advantage that they don't see daily mark to market, so they don't think it's as volatile as a levered equity investment would be. And I think it's important to realize that for most of the past decade, private equity has really benefited from very cheap funding costs. So equity markets were going up. It costs almost nothing to lever your returns. And that's changing now. Corporate debt is more expensive. That's why we think corporate debt is more interesting to buy today than it has been for most of the past decade. So I think there's a good chance that investors thinking that private equity is diversifying their portfolio and upgrading the return in their portfolio are going to be disappointed.
AI WAS THE HOTTEST TOPIC IN ’23. WHICH MOVIE BEST DESCRIBES ITS IMPACT – MONEYBALL, WARGAMES, WALL-E, OR THE TERMINATOR?
Bill Nygren: Moneyball.
Andrea DiCenso: It's most definitely Moneyball. That's how you see it used. But I mean, in the last election you could say WarGames.
Jens Peers: All of it. You know, obviously there's a bit of all of it to consider.
Jack Janasiewicz: How about we barbell it between WarGames and Moneyball, with a higher probability on Moneyball.
Bill Nygren: To me, this is kind of reminiscent of 40-plus years ago when we went through the computer revolution. And Wall Street went crazy about IBM and the Seven Dwarfs – companies like Burroughs and Sperry, Hewlett, and Honeywell, that were all making mainframe computers. And of course, most of them are bankrupt now. But it didn't mean that the computer revolution didn't have effects on other companies. A company like Walmart that was more open to using data to manage their business effectively put Kmart and Sears out of business because they adopted the new technology rather than feared it. And I think it's similar today.
There's so much fear that AI is going to put people out of work. Well, computers did the same thing. There used to be rooms full of people just sitting there on the adding machines, and it got rid of all those jobs. But now they have more fulfilling jobs. I think AI could do the same thing. Therefore, instead of looking at the arms providers in the AI wars, we're trying to look at the companies that are most open to using AI to further their competitive advantage versus the other companies that they compete with.
* Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in October and November 2023. Survey included 500 institutional investors in 27 countries throughout North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions are as of December 6, 2023 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
- Andrea DiCenso, Portfolio Manager, Alpha Strategies, Loomis, Sayles & Co.
- Jack Janasiewicz, Lead Portfolio Strategist, Portfolio Manager, Natixis Investment Managers Solutions
- Bill Nygren, CIO, Portfolio Manager, Harris Associates / Oakmark Funds
- Jens Peers, CIO Mirova–US, Sustainable Equities Portfolio Manager
IS A RECESSION IMMINENT? WHAT ABOUT A SOFT LANDING FOR THE US ECONOMY?
Andrea DiCenso: I’d worry if you start to see a rise in the US unemployment rate, because that's really the linchpin to understanding how deep or how long a likely recession could be. A soft landing, yes. But it's probably not going to feel that soft if you're an individual in a low-income bracket who is already feeling that pinch. You have higher delinquencies on your credit card statements and on auto loans. Our in-house consumer analyst says she doesn't fear a recession for that income bracket until you start to see delinquencies rise on cell phones, because that's the last thing anyone wants to give up.
Bill Nygren: Wage increases have been higher for the bottom quartile of income earners in 2023. Job openings remain high. And just a reminder, ’24 is an election year. Incumbents don't usually get re-elected in the middle of a recession. So I think everything out of Washington will be focused on trying to avoid one.
INFLATION AND INTEREST RATES. HOW DOES IT PLAY OUT IN 2024?
Jack Janasiewicz: If we look at core PCE (Personal Consumption Expenditures) inflation, ex-shelter, today it's running at 2.3% annualized. (Source: Natixis Investment Managers Solutions, as of 12/6/2023) When factoring in shelter costs/prices, we see in the real-time data that it's coming down. We're actually looking at disinflation or deflation in some areas. So you've got core PCE that has this massive pipeline of disinflation coming from shelter. That should get you to the 2% inflation target the Fed is focused on. So maybe the risk for 2024 is inflation gets to 2% a lot faster than people think.
A GEOPOLITICAL BAD ACTOR OR CENTRAL BANK POLICY MISHAP: WHAT’S THE BIGGER RISK IN YOUR MIND?
Jens Peers: For us, the bigger risk is the geopolitical risk. Obviously, we have Ukraine-Russia. We have what's happening in Israel right now. There's a potential still, although maybe lower now given the economic situation in China, of an invasion in Taiwan. There's also newer coalitions forming between countries. That type of unpredictability is something that is very difficult to model.
Andrea DiCenso: We've had a number of geopolitical events play out in the last two years. If you plan for that, you're setting up your entire portfolio for a left-tail event, and that's very difficult to do and earn positive total return for clients. In these past 12 months, we've seen triple Cs within emerging market sovereign debt rally almost 40%. You've seen triple Cs in US high yield rally roughly 14% year to date. (Source: Loomis Sayles Research, as of 12/6/2023) The bond market is willing to look through these geopolitical events. Because on a broader basis, they're looking at what is the main factor that has been influencing markets. It's been interest rates and interest rate volatility. That volatility has come down quite a bit over the last 12–18 months compared to the previous 12. So we're looking at what is the path forward on interest rate volatility. Technology was a market driver in ’23. Does it continue? What sectors do you favor?
Bill Nygren: Obviously, it's been an incredible year for technology. That's resulted in multiples that are higher for that sector. As value investors, we're really used to betting against the consensus because we tend to buy what's cheap. Rather than technology in our portfolios, we're much more interested in things like banks, insurance companies, legacy media names – the stocks that are trading at lower multiples. We do agree with the institutional investor survey consensus on energy. We think energy names are attractive and specifically think that a lot of ESG investors that have just had a blanket avoid-energy position are getting more nuanced about how they think about energy and how much more efficient the US industry is relative to the rest of the world in terms of carbon production per barrel. So we think the investor demand for energy is going to persist.
Jens Peers: Thematically, after two really poor years for renewable energy, mainly because of what's happening in Russia-Ukraine and some issues in the value chain, most of those issues are now solved for quite a lot of individual companies. So I wouldn't say go all in on renewables, but there are a few individual names that are really attractively valued today and are well positioned to benefit from this race to net-zero carbon and the move to energy independence. Another favorable area is with more R&D (research and development) spending. Developments in mRNA technology for medicine are attractive to us. We see a lot more opportunities in areas like oncology.
WHAT ABOUT CHINA AND EMERGING MARKETS?
Andrea DiCenso: What we've seen is obviously the drag from the property sector in China. There is no relief in the near term in our opinion based on our analysis. So we kind of think about emerging markets ex-China at this point. We've seen a tremendous amount of opportunities in Latin America. That's unlikely to be going away anytime soon. We would look specifically towards Brazil, Mexico, Colombia, and Chile. CEEMEA (Central & Eastern Europe, Middle East, and Africa) is a bright spot for emerging markets. I think if you had asked me if I'd be talking about Turkey as being an optimistic place to invest, even three months ago, I would have said no. Here I am, Turkey is an interesting point, yielding more than 13%. (Source: Loomis Sayles Research, as of 12/06/2023) You can find some nice opportunities, whether it be in the banking sector or in their government bonds. And, within Asia, while the yields aren't quite as crazy as South Africa or any frontier countries, we favor Korea, Malaysia, and Indonesia. And India is now rivaling the larger economies with GDP growing around 6%. (Source: Loomis Sayles Research, as of 12/6/2023)
PRIVATE ASSETS HAVE BEEN SEEN AS A DIVERSIFIER. DO HIGHER INTEREST RATES CHANGE THE DYNAMICS?
Jack Janasiewicz: I think a lot of this is a function of liquidity and then rates, because much of this is financing. So, with the higher interest rate backdrop you've seen on the listed corporate side, at least you've seen some of that remark to market. The private investment side is going to be a little bit slower to catch up to that. Maybe there will be a couple of quarters lag in terms of some of that catching up, because private markets don’t have to either A, mark to market, or B, don't have the liquidity requirements that the public markets need. So I think you might see a little bit of headlines that maybe are not quite as supportive in the near term.
Bill Nygren: To us, private equity is really just an equity investment that's levered. And the investors have the advantage that they don't see daily mark to market, so they don't think it's as volatile as a levered equity investment would be. And I think it's important to realize that for most of the past decade, private equity has really benefited from very cheap funding costs. So equity markets were going up. It costs almost nothing to lever your returns. And that's changing now. Corporate debt is more expensive. That's why we think corporate debt is more interesting to buy today than it has been for most of the past decade. So I think there's a good chance that investors thinking that private equity is diversifying their portfolio and upgrading the return in their portfolio are going to be disappointed.
AI WAS THE HOTTEST TOPIC IN ’23. WHICH MOVIE BEST DESCRIBES ITS IMPACT – MONEYBALL, WARGAMES, WALL-E, OR THE TERMINATOR?
Bill Nygren: Moneyball.
Andrea DiCenso: It's most definitely Moneyball. That's how you see it used. But I mean, in the last election you could say WarGames.
Jens Peers: All of it. You know, obviously there's a bit of all of it to consider.
Jack Janasiewicz: How about we barbell it between WarGames and Moneyball, with a higher probability on Moneyball.
Bill Nygren: To me, this is kind of reminiscent of 40-plus years ago when we went through the computer revolution. And Wall Street went crazy about IBM and the Seven Dwarfs – companies like Burroughs and Sperry, Hewlett, and Honeywell, that were all making mainframe computers. And of course, most of them are bankrupt now. But it didn't mean that the computer revolution didn't have effects on other companies. A company like Walmart that was more open to using data to manage their business effectively put Kmart and Sears out of business because they adopted the new technology rather than feared it. And I think it's similar today.
There's so much fear that AI is going to put people out of work. Well, computers did the same thing. There used to be rooms full of people just sitting there on the adding machines, and it got rid of all those jobs. But now they have more fulfilling jobs. I think AI could do the same thing. Therefore, instead of looking at the arms providers in the AI wars, we're trying to look at the companies that are most open to using AI to further their competitive advantage versus the other companies that they compete with.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions are as of December 6, 2023 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
6170020.2.1
2024 Private Assets Report
